Preconditions for Innovation: Use of highly-skilled workers is the key

INUI Tomohiko
Faculty Fellow, RIETI

If the Japanese economy is to overcome the shrinkage of the working age population and lay the foundation for sustainable growth, it is essential to raise productivity. To raise productivity, it is necessary to achieve product innovation, which creates new products and services with higher value added, and process innovation, which enables more efficient production of existing products and services. As a prerequisite, it is essential to secure and use highly-skilled workers with professional expertise and knowledge.

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In order to increase the supply of highly-skilled workers, the Japanese government promoted a significant increase in the number of graduate school students in the 1990s. As a result, the number of people who have acquired doctorate degrees rose steeply, from 10,633 in 1990 to 17,396 in 2005. Although the number has declined slightly since then, it has been maintaining at around 16,000.

Even though the number of people who have acquired a doctorate degree has risen, Japanese society has not necessarily made progress in utilizing such people as highly-skilled workers. According to the School Basic Survey, conducted by the Ministry of Education, Culture, Sports, Science and Technology, the proportion of people who obtained a job (including as a non-regular employee) remained low in FY2015 among the people who had finished a doctoral course—62% in science fields and 71% in engineering fields—compared with the people who had finished a master's course. Moreover, according to the Survey of Research and Development 2015, conducted by the Ministry of Internal Affairs and Communications, companies employed 23,538 new workers as researchers, of which only 904 had acquired a doctorate degree.

As a factor that has impeded progress in the utilization of people who have acquired a doctorate degree, the Survey on Research Activities of Private Corporations 2012, conducted by the National Institute of Science and Technology Policy (NISTEP), cited the large proportion of companies which believe that enhancing capabilities through internal education and training is more effective or that they cannot immediately make use of the expert knowledge in specific fields that people with a doctorate degree possess.

In addition, a report issued in January 2018 by the Japan Center for Economic Research presented the finding of an empirical analysis that a rise in the proportion of people with a doctorate degree in a company's workforce lowers its productivity. As factors behind this, the report pointed out problems related to education in doctoral courses and Japanese companies' failure to establish business administration and personnel management systems that can make full use of the capabilities of people with doctorate degrees.

According to the Fourth Japanese National Innovation Survey, conducted by NISTEP, while 20% of Japanese companies achieved product innovation or process innovation during the three-year period between FY2012 and FY2014, 77% did not conduct any innovation activity in the first place. A shortage of capable employees was cited as the greatest factor that impeded the achievement of innovation and the implementation of innovation activity. However, financial constraints, such as a lack of internal funds or difficulty in procuring external funds, were not cited as important factors.

Meanwhile, according to the same survey, the proportion of companies employing at least one worker with a doctorate degree was 3% among small businesses (with a workforce of 10 to 49 permanent employees), 7% among medium-sized companies (with a workforce of 50 to 249 permanent employees) and 17% among large companies (with a workforce of 250 or more permanent employees). Although the number of companies employing workers with a doctorate degree is small, such companies have a markedly higher probability of achieving product innovation than those not employing workers without one, as shown in the Figure. On a whole sample basis, the product innovation achievement probability is as much as 25 percentage points higher for companies employing workers with a doctorate degree than for companies not employing such workers.

Figure: Ratio of Achieving Product Innovation by Company Size and Whether There are Workers with a Doctorate Degree
Figure: Ratio of Achieving Product Innovation by Company Size and Whether There are Workers with a Doctorate Degree
Note: Numbers in the upper column show the ratio of achieving product innovation and the numbers in parentheses show the number of companies.
Source: "Fourth Japanese National Innovation Survey," NISTEP.

Using raw data obtained through this survey, we estimate the impact of the presence or absence of workers with a doctorate degree on companies' probability of achieving innovation with Yuya Ikeda of NISTEP. As a result, we find that companies employing workers with a doctorate degree have an 11-point higher probability of achieving product innovation and an 8-point higher probability of achieving process innovation than companies not employing such workers if the estimation takes into account various attributes that are presumed to affect the achievement of product and process innovation (e.g., proportion of employees with a master's degree, company size, and R&D intensity).

A similar estimation concerning product innovation by company size show that while the employment of workers with a doctorate degree increases the product innovation achievement probability by 10 to 14 points at small and medium-sized companies, the innovation-enhancing effect is small at large companies. This finding suggests that although the proportion of companies employing workers with a doctorate degree is higher among large companies, the companies are not necessarily making successful use of such employees.

As well as the utilization of highly skilled workers, the promotion of the adoption of IT is highly necessary in order to promote innovation. Many studies in recent years have pointed out that the promotion of the adoption of IT is an important factor for productivity improvement, but Japanese companies have not been active in utilizing IT.

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According to the "Analysis of the Differences between Japanese and U.S. Companies in the Attitude toward Management Using IT" (2013), which was conducted by the Japan Electronics and Information Technology Industries Association, while 75% of U.S. companies regard investment in IT and information systems as "very important," only 16% of Japanese did so. While "strengthening product and service development" and "changing the business model" were the effects that U.S. companies expected most from IT, "improving business process efficiency" and "reducing cost" were the effects that Japanese companies expected most.

Looking at the trend in companies' IT investment in recent years as indicated by the Basic Survey of Japanese Business Structure and Activities by the Ministry of Economy, Trade and Industry, we see that the proportion of companies making IT investment declined further from the low level of just under 20% in 2006-2008 to less than 17% in 2009 and later.

I conducted an empirical study with Senshu University Professor YoungGak Kim on the impact of IT investment on the growth rate of firms' total factor productivity (TFP) with consideration of various firm characteristics in a project sponsored by RIETI. Our results indicate that while IT hardware investment does not affect the firms' TFP growth rates in the manufacturing industry, IT software investment had a significant effect by increasing their growth rates. In the non-manufacturing industry, both IT hardware and software investments contribute to increasing the firm's TFP growth rate.

From these results, we can say that while many Japanese companies are hesitating to make IT investment, companies that have promoted the adoption of IT have succeeded in accelerating the TFP growth rate.

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Japanese companies are lagging in the utilization of highly skilled workers and the promotion of the use of IT, which are activities highly likely to raise the innovation achievement probability. A series of studies conducted by Stanford University Professor Nicholas Bloom and others found that companies' business practice is the critical determinant of the level of their productivity based on their empirical analysis. These studies showed that companies with a high level of business practice have succeeded in securing and utilizing capable workers.

One of their studies examined whether the slow adoption of IT and the low TFP growth rate in Europe is attributable to the economic environment such as market regulations or business management method. As a result, they pointed out that the management method is likely to be a more important factor in generating positive effects from IT investment.

As shown in the above, if companies are to make effective use of highly skilled workers, they need to actively introduce business administration and personnel management methods that enable them to achieve innovation. In addition, they need to make efforts to train highly skilled workers who meet companies' needs in terms of professional expertise and abilities by promoting cooperation in human resource development through the implementation of advanced joint research with universities and the dispatch of lecturers and the provision of teaching materials to universities.

>> Original text in Japanese

* Translated by RIETI.

April 23, 2018 Nihon Keizai Shimbun

June 11, 2018